Chip stocks are collapsing. Can Nvidia’s earnings save them?
Chip stocks are down 15% since their July peak, and Nvidia’s just kept pace with the S&P 500.
The AI semiconductor trade has become a one-legged stool. And we’re a couple days away from seeing if that leg can support the weight of the entire market.
Chip stocks came under significant pressure on Friday, with the VanEck Semiconductor ETF ending off 3.3%, as Applied Materials led the way down after releasing a disappointing sales forecast. The group looks poised to open in the red again on Monday.
Only one S&P 500 semiconductor company (per the Bloomberg Industry Classification Standard) is up since the VanEck Semiconductor ETF peaked on July 10: Nvidia, which reports earnings after the close on Wednesday. Analysts expect earnings per share to nearly double to $0.74 from $0.40 during the same period last year.
It’s not like the results for this industry group were poor during the most recent reporting period. Far from it: of the 15 semiconductor companies in the S&P 500 that provided quarterly updates so far, all but one (Intel, which missed horribly but still went up after!) posted larger-than-expected profits.
When stock prices stop going up on what should be purportedly good news, that’s a sign a trend may have gotten a little long in the tooth.
Four weeks ago, we posted some potential theories why Nvidia was breaking away from the rest of the pack. Both are still very pertinent:
A couple non-exhaustive, non-mutually exclusive theories on what’s going on here.
1) ASML’s latest quarterly report touched on some softness in chip demand ex-AI. The AI trade could be back to more of a winner-take-all mode, with Nvidia (rightfully) at its epicenter. A point in favor of this: every other time Nvidia’s gained at least 10% in a month since May 2023, the broader semiconductor group has done at least twice as well as it has this month. Earnings reports from the so-called hyperscalers (megacap tech firms investing heavily in AI) come well before Nvidia’s, which will allow for some more proof points for this thesis to be confirmed or rejected.
2) The bump Nvidia has gotten in the past from posting good earnings is getting pulled forward, and that’s raising the bar for how good the numbers actually have to be next to keep those gains going when the report actually lands. Some backing for this: out of the last six earnings reports, the two in which Nvidia did the best compared to semis heading into the announcement (8/23/2023 and 8/23/2024) saw a pretty lackluster relative performance thereafter.
I’d only update this by adding that earnings reports from the hyperscalers were quite solid, in terms of the read-through for Nvidia going forward, and Applied Materials’ sales outlook is another piece of evidence that demand for semis — ex-AI — isn’t running too hot.
And, to re-up this chart, when Nvidia does very, very well compared to its peers heading into an earnings report, it’s tended to do not as well thereafter.
So, the stakes are extremely high next week for the market at large, and in particular for the retail traders who’ve been bidding up Nvidia while the rest of the space falters.
